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Tackling your debts

Prepayment meter vs. Direct Debit: how different is the cost?

Posted 28 September 2015 by Christine Walsh

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Should you go pre-payment or direct debit for your utilities? Read our article to find out which is best.

Gas and electricity bills are just a part of life for most of us. After all, we all need a nice hot shower, some toast and a good strong coffee in the morning – all courtesy of gas and electric. And, you probably know by now that there are three main ways that you can pay for your bills, either quarterly by cheque, monthly by direct debit – straight out of your account, or by pre-payment meters – also known as pay-as-go meters.

What’s the difference?

When you pay quarterly by cheque or monthly by direct debit you are getting credit from your gas or electricity provider. So you are using the power or gas first and then they are billing you. Paying quarterly used to be the main option, but it makes budgeting harder as it means finding quite large sums of money every few months.  As a result, paying monthly by direct debit has become the norm.  It spreads the cost over the full year and the direct debit will go straight out of your account, with no fuss and no need for you to change anything about your payments from month to month.

A pre-payment meter is exactly what it sounds like. You would get a meter fitted in your house – someone would have to come to your property to install it – and it keeps track of what you use. Unlike a normal meter you have to pay before you use the energy. Once in place, you simply top-up your credit, which can be purchased in shops or newsagents (some providers allow you to top up online or by text), and load that credit on to your meter.  A kind of pay-as-you-go deal for gas and electricity.

Now, we can see the appeal of this way of buying energy, but, much like PAYG for mobile phones, there are big difference in what you’ll pay for pre-payment energy and normal metered tariffs for energy. So, which is best? First let’s look at the difference in price. 

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The Price Difference

If you do some number crunching, paying for your gas and electric using a direct debit is usually the cheapest option. So, where does this leave the 5.9 million people, using the pre-payment option?

According to Uswitch, they are very likely to be paying more. This is worrying because according to The Citizen’s Advice Bureau, it’s people who are already having trouble paying their bills who are put on this method of payment. So unfortunately, you end up in a situation where the poorest are sometimes paying the most.

Why is direct debit cheaper? Simple - suppliers like to get regular, reliable payments each month, which is exactly what they get with direct debit. And because of this, they’ll give the best deals and discounts to people who pay this way.

If they’re more expensive, why have them?

As we’ve said, sometimes people fall behind with their payments and one solution to this is for your supplier to install a pre-payment meter. The amount you owe is then added as a debt and when you put money on the meter you’re paying the debt off as well as topping up your electricity or gas. So, for example, say you owed £20, each time you buy £10 of credit, the debt eats up £5, leaving you with £5 worth of gas.  

This suits the suppliers, as your ‘bills’ are always paid on time, so they don’t have the cost of chasing you for money, or employing debt collection agencies to recover the money for them.

Landlords may favour this type of payment as well. This way they can avoid risking a tenant leaving a huge unpaid bill behind them when they leave.  

Can I switch off a prepay meter?

You can switch from a pre-payment to a direct debit, but there are some things that you need to check first.

First of all, if you’re on a pre-payment meter because you’ve had trouble making your payments in the past, the supplier will want to do a credit check before they allow you to pay by direct debit. Secondly, you’ll need to make sure that your account is up to date (you don’t owe them anything) before you can switch back to direct debit. If you pass these checks you should be good to go.

However, be sure to ask your supplier if they charge for the change over from a pre-pay meter to a regular one – some do and in those cases, you should ask if they’ll waive it. If they won’t waive the charge, it may be worth having a look around to see whether there are any suppliers, who’ll allow you to switch for less. If you do find someone cheaper, consider switching to them before you move back to direct debit. Be savvy, it’s always worth asking whether a supplier will reduce or waive the fee to change – they want your custom at the end of the day. To compare tariffs, have a look at an OFCOM accredited comparison site such as Uswitch.

If you want to stick with the prepayment option, it’s still worth checking the different suppliers, as there could be a cheaper option available.  

by Christine Walsh

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.